Beginners’ guide to portfolio analysis

by ManoloMongeloes

This beginners’ guide gives you all the information you need to understand the benefits of portfolio analysis and directs you to the tools you may need to carry it out.

Anyone wishing to manage their investments – and the potential risks to these investments – effectively and proactively should be using some form of portfolio analysis.

Portfolio analysis is all about finding ways to quantify the financial and operational impact of your portfolio of investments. If you are going to be able to truly evaluate the performances of all your investments and time the potential returns coming from them effectively you need to understand and use portfolio analysis.

This beginners’ guide may not have you carrying out the sophisticated techniques of
portfolio and market risk analysis used by investment specialists, but it will help you to get going on the right tracks.

What is portfolio analysis?

Portfolio analysis is a set of statistical techniques that are used to examine the performance of investment portfolios under different circumstances. It can help you to understand how you can make the most suitable trade-offs between risk and returns for your given circumstances.

This analysis can be carried out by a paid professional but increasingly individual investors are using specialised software packages to conduct it themselves. 

Portfolio analysis leaves no investment class unturned and covers bonds, equities, indexes, commodities, funds, options and securities. It helps you to balance the risks associated with specific investment classes and achieve a portfolio whose composition is most likely to give you the returns you desire at a risk level that is acceptable to you.








What does portfolio analysis involve?

Portfolio analysis is undertaken for each asset at two levels: those of risk and return. The portfolio is analysed first according to the risk appetite of the investor to ensure that the portfolio risks are within acceptable levels.

Next the portfolio’s prospective returns are calculated using an average and compound return method, with the average return being the numerical average of returns from individual assets and the compound return being expressed as the mean which allows you to consider the cumulative effect on overall returns.

Finally the dispersion of returns can be calculated which will give you a good measure of the volatility of each asset held by revealing the deviation of its expected return from the actual interest rate.

Portfolio analysis tools























If all this arithmetical jargon has you running for the door you need not worry. You do not need to undertake this analysis yourself and you do not need to pay someone else a lot of money to do it for you either. As an investor you want to be spending your time acting on what you find out about your portfolio rather than crunching the numbers to get the information you need.

There are several specialised portfolio analysis software tools that are widely available and will ease the burden of portfolio analysis significantly. These investment tools can analyse and predict future trends for all your investment classes and provide you with essential data for decision making.

Portfolio analysis can help you allocate your assets, manage your risks and attain your investment goals without even switching on a calculator. 



How can portfolio analysis best help you?


What is the value of a portfolio analysis?
Find out more about how portfolio analysis can inform your investment strategy
Investment software for risk reporting and portfolio construction

How to analyse your portfolio
More tools and tactics for portfolio analysis

Updated: 11/08/2012, ManoloMongeloes
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